ECB Cuts Interest Rates to Support Inflation Stabilization (12.12.2024)

Today, the Governing Council announced a 25 basis point cut to all three key ECB interest rates.

This includes the deposit facility rate, the primary tool for steering monetary policy. The decision was driven by the revised inflation outlook, underlying inflation trends, and the effectiveness of monetary policy transmission.

Inflation Outlook Shows Positive Progress

The disinflation process is progressing well. Staff forecasts headline inflation to average 2.4% in 2024, 2.1% in 2025, 1.9% in 2026, and 2.1% in 2027 when the expanded EU Emissions Trading System becomes operational. Excluding energy and food, inflation is expected to average 2.9% in 2024, 2.3% in 2025, and 1.9% in both 2026 and 2027.

Most measures of underlying inflation indicate that inflation will eventually stabilize around the Governing Council's 2% medium-term target. Domestic inflation has decreased but remains elevated, mainly because wages and prices in certain sectors are still adjusting to the previous inflation surge, with a significant delay.

Financing conditions are improving as recent interest rate cuts by the Governing Council gradually make borrowing cheaper for businesses and households. However, conditions remain tight due to restrictive monetary policy, and the effects of earlier rate hikes continue to affect the existing stock of credit.

Gradual Easing in Financing Conditions

Staff now project a slower economic recovery compared to the September forecasts. Although growth picked up in the third quarter, survey data suggests a slowdown in the current quarter. The economy is expected to grow by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026, and 1.3% in 2027. The recovery is expected to be driven primarily by higher real incomes, which should lead to increased household consumption, and by firms boosting investment. Over time, the diminishing effects of restrictive monetary policy should support a rise in domestic demand.

A Data-Driven Approach to Future Monetary Policy

The Governing Council remains committed to ensuring inflation stabilizes sustainably at its 2% medium-term target. It will continue to adopt a data-driven, meeting-by-meeting approach in determining the appropriate monetary policy stance. Specifically, decisions regarding interest rates will be based on the Council's assessment of the inflation outlook, taking into account new economic and financial data, the dynamics of underlying inflation, and the effectiveness of monetary policy transmission. The Governing Council is not committing to any specific interest rate path.

Source: ECB